WHF - NASDAQ

Good afternoon, everyone. Welcome to today's WhiteHorse Finance Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note this call is being recorded. And it is now my pleasure to turn the meeting over to Mr. Rob Munnings of Rose & Company. Please go ahead, sir.

Thank you, Bo, and thank you, everyone, for joining us today to discuss WhiteHorse Finance's Fourth Quarter 2025 Earnings Results. Before we begin, I would like to remind everyone that certain statements made during this call, which are not based on historical facts, including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, these are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. WhiteHorse Finance assumes no obligation or responsibility to update any forward-looking statements. Today's speakers may refer to material from the WhiteHorse Finance Fourth Quarter 2025 earnings presentation, which was posted to our website this morning. With that, allow me to introduce WhiteHorse Finance's CEO, Stuart Aronson. Stuart, you may begin.

Thank you, Rob. Good afternoon, everyone, and thank you for joining us today. As you're aware, we issued our earnings this morning before the market opened. I hope you've had a chance to review the results for the period ending December 31, 2025, which can also beyond on our website. On today's call, I'll begin by addressing our fourth quarter results and current market conditions, then Joyson Thomas, our Chief Financial Officer, will discuss our performance in greater detail, after which we will open the floor for questions. Our results for the fourth quarter of 2025 reflected improved earnings and NAV performance relative to the prior quarter. Q4 GAAP net investment income and core NII was $6.6 million or $0.287 per share compared with Q3 GAAP and core NII of $6.1 million or $0.263 per share. NAV per share at the end of Q4 was $11.68 compared to $11.41 at the end of Q3, an increase of approximately 2.4%. The increase in NAV resulted from share repurchases that were accretive to NAV by approximately $0.184 per share as well as net realized and unrealized gains of approximately $0.77 per share while also reflecting distributions paid during the quarter of $0.25 per share in base dividends and $0.035 per share in special dividends. We will continue our distribution policy framework that was previously discussed where the company intends to distribute a quarterly base distribution of $0.25 as well as make potential supplemental distributions above the base level in the future pursuant to this distribution policy. For the first quarter of 2026, the company declared a $0.01 per share supplemental distribution in addition to our base $0.25 dividend. To the extent our nonaccrual and other troubled situations in our portfolio result in recoveries or if current market conditions improve and/or base rates increase and any of these factors lead to additional earnings, we will be prepared to share those incremental earnings with investors in the form of supplemental or special distributions. Turning to shareholder value. We recognize that our shares have traded at a persistent discount to NAV, and we've been focused on taking concrete steps to improve earnings power and narrow that gap over time. Over the last several quarters, we have prioritized actions that directly support sustainable net investment income and long-term value. First, we completed a term debt securitization through our CLO vehicle, which included $164 million of AAA-rated notes priced at 3-month SOFR plus 170 basis points. This transaction improves the stability and cost profile of a meaningful portion of our secured leverage. Second, our adviser voluntarily agreed to reduce the incentive fee on net investment income from 20% to 17.5% for the most recently completed fiscal quarter and the first quarter of 2026, providing near-term support for distributable earnings. In Q4, this voluntary reduction reduced incentive fees by approximately $200,000 and provided additional support for our quarterly distributions. The adviser may extend this voluntary reduction. However, the duration and extent of any future reductions are uncertain and will be subject to ongoing discussions with the Board. Finally, during Q4, the company repurchased approximately 1 million shares for an aggregate cost of approximately $7.4 million, which was accretive to NAV by approximately $0.184 per share. Given the continued gap in price to book, our Board has approved an incremental authorization to our share repurchase program of approximately $7.5 million, bringing the total authorization to $22.5 million with approximately $15 million still available under the authorization. This expanded program positions us to continue repurchasing shares opportunistically at prices below NAV when conditions warrant. Looking ahead, in addition to executing on portfolio repositioning and disciplined origination and building on the actions we've already taken, we and the Board will continue to evaluate and pursue other potential avenues to enhance shareholder value. Turning to our portfolio activity. We had gross capital deployments of $77.1 million in Q4, which was partially offset by repayments and sales of $49.6 million, resulting in net deployments of $27.5 million before the effects of transferring assets into the STRS JV. Gross capital deployments consisted of 7 new originations totaling $64 million, and the remaining amounts were deployed to fund 9 add-ons to existing investments. In addition, there were $1.2 million in net repayments on revolver commitments during the quarter. Our new originations in Q4 included a mix of sponsor and nonsponsor deals at an average underwriting leverage of approximately 4.3x EBITDA. All of our Q4 deals were first lien loans. Pricing reflected competitive market conditions, and our focus remained on structure and credit quality. Total repayments and sales were driven by completer partial realizations in 4 portfolio companies, Brooklyn Bedding, Bridgepoint Healthcare, ELM One Call Locators and Contemporary Services Corporation. In the case of Brooklyn Bedding and ELM or in the case is of Brooklyn Bedding and ELM, we lead new financings that took out the old financings. At the end of Q4, 99.7% of our debt portfolio is first lien, senior secured and our portfolio continued to reflect a balanced mix of sponsor and nonsponsor investments. The weighted average effective yield on our income-producing debt investments decreased to 11% at the end of Q4 compared to 11.6% at the end of Q3, mainly due to lower spreads and lower base rates. The weighted average effective yield on our overall portfolio also decreased to 9.1% at the end of Q4 compared to approximately 9.5% at the end of Q3. During the quarter, the BDC transferred 2 new deals in 2 existing investments to the STRS JV totaling $19.2 million. At the end of Q4, the STRS JV portfolio had an aggregate fair value of $323.6 million and an average effective yield of 9.9%. We continue to successfully utilize the STRS JV and believe WhiteHorse Finance's equity investment in the JV continues to provide attractive returns to our shareholders. After net deployments and JV transfer activity as well as net realized and unrealized gains recognized during the quarter, total investments increased from the prior quarter by $10.2 million to $578.6 million. This compares to our portfolio's fair value of $568.4 million at the end of Q3. During the quarter, we recognized $11.3 million in net realized losses and approximately $13.1 million in net unrealized gains for an aggregate total of $1.9 million in net realized and unrealized gains in Q4. The net realized and unrealized gains of $1.9 million or $0.077 per share were primarily driven by a $1.1 million unrealized gain in Sklar Holdings, also known as Starco, a $0.7 million unrealized gain on motivational fulfillment and other net markups across the portfolio. These items were partially offset by a $0.7 million unrealized loss in Lumen LATAM. In addition, we recognized realized losses of $11.6 million, primarily driven by an $11.2 million from the Aspect Software investment restructuring and exit and $0.5 million from the partial sale of Therm-O-Disc. Importantly, these investments were already marked down in prior periods and reflected in our fair value. So the Q4 realizations largely converted previously recognized unrealized losses into realized losses, which accordingly also resulted in a corresponding net unrealized gain of $11.6 million in the quarter. With the Aspect Software realization, those debt investments were removed from nonaccrual status. Our small remaining exposure in Therm-O-Disc was placed on nonaccrual status as of quarter end, with the remaining investment already sold and exited in Q1 of 2026. Excluding the STRS JV, nonaccrual investments represented 2.4% of the total debt portfolio at fair value. The remaining issuers on nonaccrual at quarter end were Honors Holdings, New Cycle Solutions, Playmonster and Therm-O-Disc. As always, we continue to actively manage underperforming credits, leveraging our dedicated restructuring resources and the broader capabilities of H.I.G. Subsequent to quarter end, we've had some credit-specific updates worth noting. We have seen negative developments at Honors Holdings, where New Year sign-ups were below budget. And based on the current information we have, we would expect a markdown in the first quarter of 2026. In addition, Outward Hound is being sold at a price that is below our fourth quarter marks based on weak performance in Q4. The gap between the Q4 mark and the anticipated recovery is approximately $3 million. On Lumen LATAM, we received updated financial information during this quarter, and we exited a portion of that position at current market values, which were below the mark in Q4. Partially offsetting these items, we've seen positive developments in certain credits, including Telestream, Starco and Playmonster. Aside from the credits on nonaccrual, our portfolio continues to perform well. I would also note that we have modest exposure to Internet or software companies. The BDC software exposure across 6 portfolio names represents 10% of the portfolio at cost and 9% at fair value. Market conditions remain competitive with capital availability continuing to exceed new deal supply. In the mid-market, we're generally seeing sponsor-backed deals pricing in the SOFR plus 4.50% to 5.25% range and then the lower mid-market and the SOFR 4.50% to 5.50% range with terms varying by credit quality and structure. We have been avoiding certain large cap opportunities where we believe the market has been overheated, both in documentation and pricing. We are also highly focused on minimizing exposure to liability management executions and new investments. For investors less familiar with the term, liability management execution or LME risk refers to the risk that a borrower can move assets away from the existing lenders and pledge them to new lenders, effectively subordinating the original senior debt. We are working to ensure that structures and documentation provided adequate protections for all the deals we do against this risk. Looking forward, we're seeing somewhat better deal volume than this time last year. The sentiment we hear from bankers and private equity sponsors is for an increase in M&A volumes in 2026, supported by lower interest rates, abundant capital and increased pressure on sponsors from LPs to drive realizations. At the same time, the market continues to recognize the possibility of volatility from political and geopolitical developments, which could disrupt M&A activity. In the nonsponsor, conditions remain stable and less competitive than the sponsor market. Average leverage is approximately 4x to 4.5x and pricing continues to be generally at SOFR plus 600 or above with our nonsponsor portfolio performing as well as or better than the sponsor portfolio. We continue to focus significant resources on the nonsponsored market where there are better risk returns in many cases and much less competition than what we are seeing in the on-the-run sponsor market. We currently have 21 originators covering 12 regional markets. Given the market conditions, these originators are heavily focused on sourcing off-the-run sponsor deals and nonsponsor deals as we look for value in a market where there is limited deal flow and a lot of aggressiveness. Subsequent to quarter end, the BDC has closed on 2 new deals and 7 add-on investments totaling $20 million and had 1 sale on Therm-O-Disc totaling $1.1 million. Following the net deployment activity to date in Q4, the capital reserve for share buybacks to BDC's remaining capacity is very limited. At the end of the fourth quarter, the STRS JV's remaining capacity was approximately $55 million and pro forma for recently mandated deals to be eventually transferred and anticipated repayments, the JV's capacity is approximately $35 million currently. Additionally, we continue to expect a normal level of repayment activity over time. For 2026, our current estimate is that approximately 30% of the portfolio could repay over the course of the year, consistent with the typical 3- to 3.5-year average life for loans although actual repayment timing will be driven by M&A, refinancing activity and company-specific outcomes. Our pipeline remains lower than normal for this time of year. We currently have 5 new mandates and are working on 1 add-on to existing deal. Our 5 mandates are all sponsored deals. While there can be no assurance that any of these deals will close, all of these credits could fit into the BDC or our JV should we elect to transact and if there's room for more assets. All the sponsor mandates have pricing of 4.50% to 5.50% over SOFR. With that, I'll turn the call over to Joyson for additional performance details and a review of our portfolio composition. Joyson?

Thanks, Stuart, and thanks, everyone, for joining today's call. During the quarter, we recorded GAAP net investment income and core NII of $6.6 million or $0.287 per share. This compares with Q3 GAAP NII and in core NII of $6.1 million or $0.263 per share as well as our previously declared fourth quarter base distribution of $0.25 per share. Q4 fee income was approximately $0.8 million, primarily due to higher prepayment fee activity relative to the prior quarter. For the quarter, we reported a net increase in net assets resulting from operations of $8.4 million. Our risk ratings during the quarter showed that approximately 85.9% of our portfolio positions either carried a 1 or 2 rating, an increase from the 81.8% reported in the prior quarter. Upgrades during the quarter included investments in Telestream and Max solutions. Downgrades during the quarter included moving our positions in Outward Hound from a 4 to a 5 rating as well as Therm-O-Disc from a 3 to a 5 rating, given those investments anticipated exit values in Q1. As a reminder, a 1 rating indicates that a company has seen its risk of loss reduced relative to initial expectations and a 2 rating indicates the company is performing according to such as initial expectations. Regarding the JV specifically, we continue to utilize the platform as a complement to the BDC. As Stuart mentioned earlier, we transferred 2 new deals in 2 existing investments during the fourth quarter to the STRS JV totaling $19.2 million. As of December 31, 2025, the JV's portfolio held positions in 43 portfolio companies with an aggregate fair value of $323.6 million compared to an aggregate fair value of $341.5 million as of September 30, 2025. Leverage for the JV at the end of Q4 was approximately 1.07x compared with 1.24x at the end of the prior quarter. The investment in the JV continues to be accretive from our BDC's earnings, generating a low teens return on equity. During Q4, income recognized from our JV investment aggregated to approximately $3.8 million compared to approximately $3.6 million reported in Q3. As we have noted in prior calls, the yield on our investment in the JV may fluctuate period-over-period as a result of a number of factors, including the timing and amount of additional capital investments, changes in asset yields in the underlying portfolio, and the overall credit performance of the JV's investment portfolio. Turning to our balance sheet now. We had cash resources of approximately $29.7 million at the end of Q4, including $22.7 million in restricted cash. As of December 31, 2025, the company's asset coverage ratio for borrowed amounts, as defined by the 1940 Act was 179.1%, which was above the minimum asset coverage ratio of 150%. Our Q4 net effective debt-to-equity ratio after adjusting for cash on hand was approximately 1.15x compared with 1.07x in the prior quarter. In regards to our share repurchase program, as Stuart noted earlier, our Board approved a $7.5 million increase to the existing authorization, bringing the total share repurchase program to $22.5 million, with approximately $15 million of that still to be used. I'd like to also highlight that in addition to the company's share repurchase activity, certain company insiders and other individuals and H.I.G. affiliate employees also purchased shares in the open market during the prior quarter, including 87,000 shares by certain officers and directors of WhiteHorse Finance as disclosed on Form 4 filings. This demonstrates their view of WhiteHorse Finance's valuation. Before I conclude and open up the call to questions, I'd like to discuss our recent distributions and corresponding distribution policy. This morning, we announced that our Board declared a first quarter base distribution of $0.25 per share. Consistent with our existing distribution framework, the Board also evaluated and declared a supplemental $0.01 per share distribution in addition to the regular quarterly distribution. The distributions will be payable on April 6, 2026, and to stockholders of record as of March 12, 2026. As a reminder, the framework the Board will use to determine supplemental distribution, if any, will be calculated as the lesser of: one, 50% of the quarter's earnings that is in excess of the quarterly base distribution; and two, an amount that resulted no more than a $0.15 per share decline in NAV per share over the current quarter and preceding quarter. Earnings for the purpose of measuring the excess over the quarter's base distribution is net investment income. The NAV decline measurement is inclusive of the supplemental distribution calculated and to be clear, is measured over the 2 most recently completed quarters. We believe this formulaic supplemental distribution framework allows us to maximize distributions to our shareholders while preserving the stability of our NAV, a factor that we do believe to be an important driver of shareholder economics over time. In assessing distributions, we also consider our taxable income relative to amounts that we have distributed during the year when setting our overall dividend. Our current estimate of undistributed taxable income, sometimes referred to as our spillover as of the end of Q4 2025 is approximately $27.6 million, and pro forma for our distribution already made in January 2026 is approximately $21.6 million. We continue to believe that having a healthy level of spillover income is beneficial to the long-term stability of our base dividend. We will continue to monitor our undistributed earnings and balance these levels against prudent capital management considerations. As I said previously, we will continue to evaluate our quarterly distribution, both in near and medium term based on the core earnings power of our portfolio in addition to other relevant factors that may award consideration. With that, I'll now turn the call back over to the operator for your questions. Operator?

[Operator Instructions] And we'll go first today to Rick Shane with JPMorgan.

Look, solid order. Stock is still trading 40-plus percent discount to NAV. You have announced an increase to the repurchase. I am curious, and this is not going to be a shock given all the questions that I've asked over and over again on earnings calls. How are you balancing the opportunity in terms of what's out there for new deployment versus the attractiveness of your stock? And also, as we think about that, can you just give us a sense of how you're going to be managing leverage as well?

Yes. Thanks for the questions, Rick. And the simple answer is at the current trading levels or really anything close to the current trading levels, we think our stock represents a very attractive purchase, which is why the Board originally authorized the $15 million buyback and why insiders, including myself, have been buying shares at or near current levels. Given how far the shares have traded down and given the success of the buyback in the last quarter, the Board authorized an increased amount for buybacks. We have very limited availability of capital for new on-balance sheet transactions. The JV generates a higher return. And so we are still doing some JV transactions. But as long as the shares are continuing to trade at this type of discount, one of the best things we can do with our capital is to buy the shares. And then also that it wasn't in your question, but I'll highlight, we and the Board are viscerally aware of the significance of the discount and are looking at options that we can try to avail ourselves of to improve the earnings of the BDC and/or improve value to shareholders.

I appreciate that. And again, I mean, look, I think the challenge ultimately is, I think you would suggest that of your investment options behind the stock at this discount for yourselves might be the most attractive. But in general, we've seen BDCs struggle with that approach. Is the expectation if we see net runoff in the portfolio that, that capital will largely be redeployed into repurchases at this point? Is that how we should be thinking about things? Or how will you balance that?

The Board is going to continue to evaluate the trading price vis-a-vis the NAV and make decisions with the management to try to optimize performance for the shareholders. That is why even though we had enough capital to continue the buyback into the next quarter, the board wanted to send a message to shareholders by increasing the capital by another $7.5 million. And each quarter, the Board will look at the trading level and the market to determine what it thinks the best use of capital would be. But at the moment, as opposed to putting assets on the balance sheet, we are primarily focused on repurchasing shares at currently, as you said, a 40% or more discount to NAV, which is very accretive to both NAV and also accretive to NII.

We'll go next now to Christopher Nolan with Ladenburg Thalmann.

Following up on the previous question. What measure does the board use to compare the performance of WhiteHorse BDC to its peers?

We look at a whole series of metrics. Joyson, I may pass it to you to highlight what those metrics are. But we look at return on the share price. We look at costs that the BDC incurs versus others, and we look at our trading level vis-a-vis the discount to NAV compared to other BDCs. Joyson, did I miss any there that are important?

No, I think I would just add also just that the dividend yield relative to NAV, obviously, based on our own analysis on what the core earnings power of the portfolio is.

Okay. Do you guys feel that your exposure to the JV senior loan funds effectively takes a first lien investment on the scheduled investments, puts it into the JV and suddenly, you are in a subordinated position because you're holding equity in the JV. Is that a correct analysis?

We put leverage on the JV, and we are subordinated to that leverage. That is correct.

Okay. So you're in a subordinated position taking higher -- you're getting a mid-teens return. Do you think in the current environment, which is sensitive to the asset quality of private credit that part of the discount in your share price could be the fact that the market is looking at these SLF positions and saying they're second lien and they're given the appropriate haircut?

We haven't heard that from any of our covering analysts nor have we heard that directly from its shareholders. The JV portfolio is remarkably clean in terms of performance. And while we do have leverage on the JV and leverage on the BDC, that leverage is against a pool of first lien assets and modest leverage against first lien assets is, frankly, a very common thing in the direct lending market and the BDC market. And if we heard from shareholders or covering analysts that the STRS JV was a reason or a key reason for the share discount, we would certainly take that information in, communicate it to the Board and make decisions based on that. But again, so far, I've gotten no feedback that would indicate that, that would account to the discount to NAV of the trading level.

Got it. Okay. Well, your stock is trading roughly almost a 16% dividend yield on the stock price. On the new NAV, it's roughly trading a 9% yield, which is okay. But your stock price is 50%, 60% of book. I mean, there has to be a real big issue. And the only thing that's left there is most likely the portfolio. I'm just putting it out there. I mean, anyhow...

Chris, I would tell you that we strive to be transparent and realistic in our marks. That is why, historically, you've seen some assets that mark down and continue to mark down but other assets that get marked down and then get marked up, which include names like Telestream, [ Chase ], and I mentioned this quarter, we're seeing positive news also on Playmonster. Too early yet to know whether there will be a markup. But we agree that the discount to the NAV is extreme. And we are trying to take action to improve shareholder value, starting with the share buyback and also with the refinancing of the leverage at a cheaper rate. And we are talking to advisers about anything else we can do that would improve value for shareholders.

No argument on the marks. And I think what you guys are doing in terms of repurchases is definitely awesome. And I hope you continue the waiver and the repurchases. I think it's a great use of capital. My point is, this is an elephant in the room, and it's effectively a second lien position. At a time when financial services companies are -- or the sector is under scrutiny, BDCs in my humble opinion, tend to be valued more on a discounted value of their NAV, which leads to haircuts in terms of the type of assets in the book. So that's just my two cents.

[Operator Instructions] We'll go next now to Heli Sheth with Raymond James.

You mentioned an active M&A market, but also a lower than normal pipeline currently. Any further insight into what we should expect in terms of timing or pacing of both repayments and originations for the year? Are there any catalysts down the line that might drive more activity?

Yes. Just to be clear, we have had noticeably better activity and volume in Q1 of this year so far than we had in Q1 of last year. But as we sit here now in early March, the pipeline that we have looking forward, March into April is not as strong as it was at this time last year. Now you'll also remember or I'll remind folks that at this time last year, there was a fair amount of optimism in terms of M&A activity coming back. And then the tariff issues arose, which threw a real monkey wrench into a lot of people's plans on the M&A side. There is, once again, optimism from the bankers we are speaking to and from private equity shops we're speaking to regarding likely activity, M&A activity in 2026 for the reasons that I highlighted in my call, including lower interest rates and abundant capital with pricing on that capital being at or near all-time lows. But as we've seen just in the past couple of days, things can certainly happen on the geopolitical side that were not forecast and can have an impact on M&A activity. So we currently are projecting based on what we see, improved M&A activity for the year. We think that, that could lead to slightly better pricing in the marketplace. But that slightly better pricing is likely to be offset by rate cuts, whether it's 1 or 2, which I think is the current conventional wisdom or whether it's 3 or 4 driven by leadership of the Fed likely changing in May.

Got it. I appreciate the detail. And in that pipeline, is there any sort of shift in the kinds of deals that you're seeing maybe in terms of sponsor, nonsponsor incumbent versus new borrowers or LTVs, anything along those lines?

We're seeing fewer deals that are straight repricings because the lower pricing has now been in the marketplace for about 1.5 years to 2 years. So we are seeing more new M&A deals. In terms of sponsor nonsponsor, we finished the year with a couple of non-sponsor deals in Q4. But the nonsponsor pipeline has been lighter than normal here in the first quarter of 2026. We do think that the nonsponsor market in general is more appealing than the sponsor market right now, largely because in the sponsor market, there are over 200 active direct lenders. But in the nonsponsor market, at least in the mid-market and lower mid-market, we see fewer than 10 shops who actively originate nonsponsor mid-market and lower mid-market deals. So it's a much less competitive market and as evidenced by the nonsponsor deals that we did in Q4, we are getting still pricing of 600, 650 or even 700 on nonsponsor deals at modest leverage and modest loan to value.

[Operator Instructions] And gentlemen, it appears we have no further questions this afternoon. So that will bring us to the conclusion of today's conference call. Ladies and gentlemen, I'd like to thank you all so much for joining the WhiteHorse Finance Fourth Quarter 2025 Earnings Call. Again, thanks so much for joining us, and we wish you all a great day. Goodbye.